Electronic Currency (e.g., BitCoin) – An End Run Around the Fed?

When I first heard the position that the federal government should get out of the business of providing a currency I thought it sounded like the authors were not quite as connected with reality as one would hope. However, I have been reading and hearing more and more about the general idea and I no longer think it is completely nuts. It still seems unlikely we would ever go there in the foreseeable future but I can now see the advantages. In extremely brief form, the argument in favor of private market for money is two-fold. 1. The Federal Reserve has done a lousy job of keeping the economy on an even keel by ‘managing’ the money supply. A money system more decentralized and separated from control of politics and/or a small group of people would stand a better chance of providing a stable and predictable base for economic activity. 2. A private money supply might offer a more innovative and accountable financial system. It would make the managers of the money supply more accountable, which would reduce risk taking. It would reduce the barriers to innovation, which could make it easier for credit to flow where it can do the most good.

Recently I heard two podcasts that made it seem that there is a chance that an internet currency called BitCoin that could grow to the point that it could provide a viable alternative to government-backed money. The first podcast was on Security Now (also linked here) (a podcast mostly about computer security) and the second was on EconTalk. BitCoin is a decentralized electronic currency. Provided you can find a vendor that will take them, you can spend BitCoins to purchase items on the internet. You can hold them in an account and convert them into another currency, say dollars. Security Now discussed the technical aspects and the host, Steve Gibson, gave them a thumbs up for getting the security and technical details right. Gavin Andresen, the Principal of the BitCoin Virtual Currency Project talked to Russ Roberts, the host of EconTalk about the economic and social aspects of BitCoin. If one of the big outfits (e.g., Google, eBay) were to start accepting them I wonder if it could really take off? If it did, it could offer the possibility of a freely floating, non-government-backed currency as a basis for significant economic activity.

It will be fun to see how this develops. I’m not quite ready to go out and buy some BitCoin but I will be watching shopping sites to see if they start taking BitCoins.